Delaware's Irrelevance

Abstract

According to its critics, most prominently Lynn LoPucki, Delaware has become so desperate for large corporate bankruptcy cases that it has diluted its oversight of these cases, resulting in a dramatic increase in repeated chapter 11 filings. This, Professor LoPucki argues, is evidence of corruption in the corporate bankruptcy system. The defenders of Delaware acknowledge the higher refiling rate in Delaware but argue that surely Delaware must offer some advantage, given the sophisticated parties that continually decide to file there.

But all of this assumes that whether or not a case filed in Delaware is the proper criterion. Using a sample of 337 chapter 11 cases from Lynn LoPucki's Bankruptcy Research Database, I present a new regression model that predicts whether a large chapter 11 case will reenter bankruptcy within five years. Among the factors in the model are variables that capture debtor characteristics like asset size, variables that capture underlying economic conditions at the start and conclusion of the debtor's chapter 11 case, and variables that indicate whether or not the debtor was engaged in one of several key industries.

None of the variables in the equation relate to whether or not the case filed in Delaware. In fact, the model's performance substantially declines upon the inclusion of Delaware. The model also performs much better than a simple model that tries to predict refiling solely based upon whether or not a case is filed in Delaware.

My model does not conclusively prove Delaware's irrelevance to the issue of whether or not a case will enter bankruptcy again, but it challenges the faith that Delaware plays a key role in the problem of refiling and raises several additional important questions. Most notably, has the whole of bankruptcy scholarship been focused in the wrong place?